*** What you need to know about CGT and unit trust investing…

*** Get your first R10,000 tax-free...

*** When are you liable to pay CGT…? and more...

Dear Investment Academy reader,

Alright, before we even get into this week’s issue, there’s something I’ve been itching to tell you about! You know how I always carry on about making money from the recession right?

Well, we’ve just made a breakthrough and I really want you to take a look at this. It’s called “The Shorting Report” and I think it’s the best thing since sliced bread…

Here’s why…

It shows you an investment strategy that very few South Africans are taking advantage of. I’m not going to go into too much detail about it here, but I was seriously excited when I edited this e-report. You’re about to discover a professional trader’s strategy for identifying and profiting from falling share prices.

The guy’s name’s Jeff Clark and he knows his stuff…

Okay… let’s get back to today’s issue

Last week, I wrote to you about Capital Gains Tax (CGT) and how it affects you relating to property investments. On Monday, I received a question asking how CGT relates to investing.

Well, of course I was excited to reply and decided to do a follow up article on CGT related to investing today! Now CGT isn’t something that can be covered in two issues. So, this week we’re going to look at CGT relating to unit trusts.

Don’t worry, I’ve updated the Investment Academy Dummy Portfolio, just in case you’re wondering how that’s doing. But, we’ll get there later! Let’s eliminate the CGT confusion first.

CGT and unit trust investing… What you need to know

The first thing you need to understand about CGT is that the tax is applied differently to different assets.

When it comes to unit trust investing, you, the investor, will pay CGT on any profit you make once you sell your units and make a profit. Unit trust management companies won’t pay CGT on any trading they do in the underlying investments.

3 important rules about unit trust investing and CGT:

•    As a unit trust investor, you only incur CGT when you sell your units in a unit trust.
•    You’ll only bear a CGT cost once (when you sell your units).
•    CGT won’t be paid when a portfolio manager restructures a unit trust portfolio by selling an underlying share or bond.

The main reason that portfolio managers pay CGT is so they’re not distracted by tax issues. Instead, they put all their focus on fulfilling the mandate of the portfolio and producing better investment performance.

Unit trust investors decide when to become liable for CGT

This allows you to defer tax and plan your investments according to your own investment strategy. You could, for example, not pay CGT for as long as 20 years, if you hold onto your investment and don’t sell anything for profit for that period.

All local and foreign unit trusts are subject to CGT, except for money market funds, which have a fixed price and which generate income rather than capital gains or losses.

Get your first R10,000 tax-free

Each tax year, the South African Revenue Service (SARS) gives you an exclusion of R10,000 on the sum of all your capital gains and losses.

This means if you cash in your unit trusts, the first R10,000 gain is exempt from CGT.

It also means that should units sold in one fund have been sold at a loss and the units from another sold at a gain, you have the benefit of setting off the loss against the gain.

The net gain is then further reduced by the R10,000 exclusion benefit. If the sum of the capital gains and losses is negative, the aggregate loss must also be reduced by the annual exclusion of R10,000.

Your net capital loss as assessed by SARS may be used to further reduce this figure in future, which is then referred to as a "net capital gain" or "assessed capital loss".

SARS – The only friend you don’t want knocking your front door

You should always get into the habit of paying your CGT. The last person you want knocking at your door is the taxman coming to collect his dues.

Next Wednesday, we’ll look at CGT and your personal investment portfolio. I’ll also show you what forms to use and how to declare your investment income.

Please take a look at the Dummy Portfolio below and you can see what our share has been performing.

Till next week,

Aiden Sookdin
For the Investment Academy